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Impact of non-homogenous distributor's preferred allocation on shortages in hospitals

Adelina Gnanlet (Department of Management, Mihaylo College of Business and Economics, California State University, Fullerton, California, USA)
Hyun-cheol Paul Choi (Department of Management, Mihaylo College of Business and Economics, California State University, Fullerton, California, USA)

Management Decision

ISSN: 0025-1747

Article publication date: 13 May 2014

251

Abstract

Purpose

Hospitals procure high volumes of medical supplies through large distributors in order to leverage economies of scale. However, when shortages hit, hospitals incur high penalty costs by purchasing from secondary markets. In this paper, the authors counter the hospital's typical purchasing strategy that a collaborative relationship with a large, Tier I medical supply distributor is beneficial under all conditions. The paper finds that during shortages the more beneficial strategy is for the hospital to add a medium-sized, Tier II distributor who offers a transactional relationship and is willing to provide a “preferred allocation” in return for a pre-committed annual purchase contract. The paper aims to discuss these issues.

Design/methodology/approach

The authors assume availability of order volume to be a stochastic process and formulate the problem as a two-stage stochastic programming model, with optimal allocation in the second stage. The authors analyze the first-stage objective function using full-factorial numerical experimentation and perform a complete search for optimal volume mix. In addition, the model accounts for purchasing relationship, shortage cost, and varying price discount schedules.

Findings

Under no shortage situation, hospitals purchase its entire order volume from Tier I distributor. However, during shortages, for any increase in preferred allocation from the Tier II distributor, hospitals purchase high volumes from the Tier II distributor except when preferred allocation and availability is high. The paper finds that the average cost savings for the use of preferred allocation is 16.14 percent.

Originality/value

Existing purchasing literature focusses on the benefit of using single/multiple homogenous distributors under all conditions. In this paper, the authors examine the benefit of using non-homogenous distributors under conditions of shortage when one of them is willing to provide preferred allocation under varying price discount schedules.

Keywords

Citation

Gnanlet, A. and Paul Choi, H.-c. (2014), "Impact of non-homogenous distributor's preferred allocation on shortages in hospitals", Management Decision, Vol. 52 No. 3, pp. 624-641. https://doi.org/10.1108/MD-04-2013-0224

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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